In the late 17th century, a series of advances were made in finance. Though originating in England, this period of increasing sophistication became known as the ‘Financial Revolution’ even outside Britain. Long-term government borrowing, central banks, and stock exchanges were each either born or developed into more recognizable forms in this period. It was a curious setting for such a revolution; at the time, England was under a myriad of fiscal and monetary strains, many connected to a war underway against France. Yet, financial ingenuity abounded because of, and not in spite of, this strain.
By the 1690s, the Royal Mint had for centuries held the responsibility of minting England’s coins. It operated by accepting gold and silver at a ‘mint price’ and producing coins from these metals. England operated on a bimetallic monetary standard; both gold and silver formed the country’s money. Even in the late 17th century, coins were struck manually and quality standards were poor. Coins that were off-struck, meaning that the design was not centered on the metal planchet when produced, commonly found their way into circulation anyway. Coins produced by the mint were also slow to be replaced. In the mid-1690s, perhaps 70% of the £10 million in silver coins circulating dated back to before 1649.
Gold and Silver
Bimetallic standards were difficult to maintain because the market prices of gold and silver did not always move in tandem. This means that either one metal or the other would be most favored for producing coins and this could always change. In the 1690s, the price of silver rose relative to gold. The shift was large enough that gold became worth more coined and silver worth more melted down and exported. More gold bullion was sent to the Mint for coinage as the mint price of gold was higher than the metal’s market price. Estimates indicate that the value of gold guineas, large gold coins then in circulation, rose from £6.4 million at year-end 1693 to over £10 million three years later.
Silver, by contrast, was undervalued; it was worth more in raw metal than in coins. Consequently, silver coins in England were often clipped at their edges. The metal extracted by people defacing the coins was sold in commodity markets and usually exported abroad. Clipping should be obvious but the poor quality and the age and wear of coins produced by the Royal Mint made uncovering perpetrators of this practice more difficult. By 1694, two-thirds of the silver coins then in existence had been extensively clipped. Meanwhile, the volume of full-weight silver coins in circulation may have fallen from £2.5 million in December 1693 to just £1 million by June 1695.
Essentially, gold found its way to England as silver was either hoarded, clipped, or exported abroad. So, while valuable gold coins became abundant, smaller-denomination silver coins became scarce. At the same time, either because of the growing production of gold coins or because of the recent creation of the Bank of England and its issuances of banknotes or for some other reasons, the total money supply was not actually falling. Indeed, prices were rising during the period.
Pamphlets and Proposals
To find solutions to the monetary issues, a ‘Commission on the Coinage’ was formed in 1694. Some of the brightest minds in England had their opinions of what ought to be done, including the likes of the architect Sir Christopher Wren and the philosopher John Locke. This was an era before specialized economists plied their trade. The Secretary to the Treasury William Lowndes favored a revaluation whereby new silver coins with the same weight and fineness of the old five-shilling crown pieces would instead be worth six shillings and three pence, an amount 25% greater, reflecting the new market price of silver.
The physicist and future Warden and Master of the Royal Mint, Sir Isaac Newton, also seemed to favor a devaluation that allowed an ounce of silver to buy more shillings than it had hitherto. Regarding the ratio between the mint price of gold and silver, Newton said that “care should be taken that they bear nearly the same proportion to one another at home and abroad”. Despite these suggestions, the commission instead put forward a plan conceived by John Locke to replace existing silver coins with new coins meeting official specifications, a simple recoinage rather than a revaluation.
The ‘Act for Remedying the Ill State of the Coin of the Kingdom’ was passed by Parliament in January 1696. The law was implemented in the spring, just after Newton was made Warden of the Royal Mint. The legislation declared that clipped coins would no longer be legal tender or accepted for payment of taxes.
Though perhaps a poor solution from the start, the recoinage was botched anyway. The Royal Mint could not meet the need for new coins before the old ones were demonetized. The act addressed coin clipping but this was a symptom of the problem; the mint price of silver was still divorced from the metal’s market price. True, Parliament did revalue the gold guinea, from 30 to 28 shillings, to bring the previously higher mint price of gold closer in line with market prices. However, this was still too high a value. Eventually, in 1717, the value of the guinea was officially reduced all the way to 21 shillings, where it remained for the history of that coin.
No appreciable quantity of new coins emerged until late 1696. The estimated value of money in circulation, inclusive of banknotes issued by the Bank of England and other banks, fell from the region of £26 million in December 1695 to under £17 million six months later. This measure excludes bank deposits for which no data exists from late 17th century England. In any case, the shortage of money had severe effects.
Due to the shortage of coins, depositors began to redeem banknotes for precious metal specie at the Bank of England. The Bank, then just two years old, had inadequate reserves and had been stretched thin making advances to the government which was in the midst of fighting the War of the Grand Alliance against France. The Bank suspended redemptions from May through October 1696. It received a loan from the Dutch government though, restoring its financial position somewhat. Nonetheless, the Bank of England was called on to provide further aid to the state in 1697, issuing new stock paid-in with short-term government securities, called tallies. This supported the market for short-term government debt.
During the financial crisis then underway, stock prices fell. Shares in the East India Company had fallen from £200 to £37 between 1692 and 1697, those of the Royal African Company from £52 to £13, and those of Hudson’s Bay Company from £260 to £80. The stock of the Bank of England meanwhile went from trading at a nearly 50% premium to face value in 1696 to nearly a 50% discount in 1697.
Despite the turbulence, this period in financial history coincided with the ‘Financial Revolution’, an era of faster financial development in late 17th century Britain. It was no coincidence. Financing the war underway required financial ingenuity and people had to resort to using credit in lieu of small coins during the botched recoinage. During this crisis, Charles Davenant, an advisor to the government, commented on an expansion of credit, remarking that “when the Coyne grew so corrupted, Credit in a manner performed all the Offices of mony”. This was a development he welcomed. In any case, the crisis subsided with the end of war in 1697.
The 1690s saw a financial crisis that to modern eyes would seem quite spectacular. A government already struggling to borrow attempted to solve a monetary problem in a manner that triggered an even larger crisis. The bungled recoinage caused a run on the Bank of England and a stock market crash, one of the first in history. Nonetheless, the crisis did not set Britain back more than a few years or even months. The war against France ended and Britain concluded the decade with new institutions: government bonds, a central bank, an intact stock exchange and credit market, a reformed coinage, and perhaps most importantly, an improved understanding of all of the aforementioned features of its new economy.
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1. Chown, John Francis. A History of Money from AD 800. Routledge, 2001.
2. Horsefield, J. K. “Inflation and Deflation in 1694-1696.” Economica, vol. 23, no. 91, Aug. 1956, pp. 229–243.
3. Narron, James, and David Skeie. “Crisis Chronicles: The ‘Not So Great’ Re-Coinage of 1696.” Liberty Street Economics, Federal Reserve Bank of New York, 30 Sept. 2013.
4. Scott, William Robert. The Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720. Cambridge University Press, 1912.